Carol, My homeschool group has been around for 20 years. I was told that we are an “unincorporated association.” What does that mean?
You ask an excellent question. I’m going to share a reply from an attorney Stephen Fishman from Nolo.com, the publisher of very helpful legal book. I have several Nolo books on my shelf.
What is An Unincorporated Nonprofit Association?
By Stephen Fishman, J.D.
What happens, legally speaking, when a group of people get together and decide to perform some task without filing any legal paperwork or establishing any formal legal structure? Whether they know it or not, they have formed an unincorporated association. “Unincorporated association” means an unincorporated group of two or more persons joined by mutual consent for a common lawful purpose, whether organized for profit or not.
Now, if the lawful purpose they’ve joined together to accomplish includes earning a profit, their association is automatically a partnership or joint venture for tax and most other legal purposes. For example, if two people get together and decide to operate a food truck, they’ve formed a partnership, even if they file no paperwork.
But, if the purpose for the association is to benefit the public some way, and does not include earning a profit, the association’s members have formed an unincorporated nonprofit association. People form nonprofit unincorporated associations all the time; often without being aware of it. For example, if you and several of your neighbors get together to help raise funds to keep your local library branch open, you’ve formed an unincorporated nonprofit association.
So that’s what your homeschool group is: an association of people trying to benefit the public in some way. in your case, you are benefiting families who homeschool their children in your local area.
Drawbacks to unincorporated association
But Mr Fishman, the attorney rom Nolo.com goes on to warn that unincorporated association has some drawbacks…
The biggest drawback to the unincorporated nonprofit association, and the reason nonprofits often abandon this form in favor of a nonprofit corporation, is that it has no separate legal existence apart from its members. Because it is not respected as a separate legal entity, its members generally can be personally liable for its debts and liabilities. Some states, such as California, give some limited liability to nonprofit association members; but it’s not as good as the protection obtainable from a nonprofit corporation. Moreover, unless your state law contains an “enabling statute” granting such rights entities, an unincorporated association cannot hold or receive property, or sign contracts, in its own name.
Because of these limitations, nonprofit unincorporated associations are usually used to accomplish limited short-term goals, such as raising funds for a library. Nonprofits with long-term missions should usually incorporate. For more on incorporating, see Nolo’s article, Five Reasons to Incorporate Your Nonprofit.
Let me rephrase what Mr. Fishman is saying: Most homeschool nonprofits don’t stay as unincorporated associations. They file paperwork in their state (called articles of Incorporation) to form a nonprofit corporation. Nonprofit corporate status offers legal protection for members and leaders by limiting the liability to the nonprofit’s assets. The members and leaders are not personally liable for the debts of the nonprofit if they are sued. That helps leaders sleep better at night!
I also appreciate his point that groups that are temporary can get by with being an unincorporated association. But homeschool nonprofits with longevity should seriously consider filing the paperwork to become a nonprofit corporation.
Homeschool groups dealing with children are at higher risk as are larger homeschool programs with bigger budgets. They should file the paperwork to be a nonprofit corporation in their state.
My book the IRS and Your Homeschool Organizatoin discusses nonprofit incorporation, its benefits and costs.
These podcast episodes discuss nonprofit incorporation:
Carol Topp, CPA
Helping Homeschool Leaders